Everybody gets told to save money, but they don't tell you to invest your money. This is a mistake! I started investing before I was 20, most of my friends are the same age and spent their money on cloths or other shiny things. Here is why they are wrong:
- Experience: Everybody makes mistakes. The earlier you do, the longer you can profit from your experience
- Motivation: You won’t get rich overnight, but seeing small profits can keep you motivated to save money
- Long term: You have many years ahead of you “The power of compound interest is the most powerful force in the universe”
Research is the first step which requires a lot of reading. There are a bunch of sites that offer free information. Search for dividend champions (DC), these are companies who have paid their dividends without a cut for over 25 years. Study the list and select 5-10 DC you find promising. Visit the websites of the companies you chose, especially the Investor Relations Tab. Your impression and understanding of the business model are as important as a company’s finance for the final decision. If you do not understand the business you cannot evaluate if the company will be around in 20 or 40 years.
After picking your favorite stocks it is time to set up a watch list which keeps track of the current price of your favorite stocks. Features I wanted were an email limit alarm and mobile app. Do some research into online brokerages, most of them have their own watch list. Look for one with low commissions and forget about their advertised research material and analytics, you should always do your own research! After registering at a trustworthy online brokerage transfer the investing funds into the account, but do not buy your stocks blindly! Think about the value of the companies and set a limit either to buy directly at that price or to get notified. DCs are rarely fairly valued or even undervalued so this requires some patience. Don’t forget the allocation: it is important at what price you invest but also how much. The commission you have to pay should be less than 1% of your investment, otherwise it is hard to make a profit. I, for example, started by investing 1000€+commissions into Coca-Cola and Swiss-Re.
Always reinvest your dividends! This is very important to take full advantage of the compound interest. Here is some simple math: we assume you invest 10000€ in company 10000€ A and B, both pay 2% dividend but you reinvest in company A and keep the money from B. After 25 years B has earned you 5000€ but A earned you around 6400€ or 28% more. Another example to show you the power and beauty of compound interest: since you are still in your 20s, we assume a period of 40 years and only 1000€ with a return rate of 5% which is reasonable over long periods of time. After 40 years your investment earned you 6000€ which equals a averaged annual return rate of 15%. Do the same math with 45 years and you get 8000€ (17.7% averaged return per year). It is an exponential increase which means, the longer you wait the better the returns. Now this is all pure math, in reality you do have to check regularly if your investment is still good and earning you money. To avoid forgetting to check your investments, make it a ritual such as every Sunday after breakfast.